Risk Transfer Schemes the Example of CCRIF SPC

Transcription

1 Risk Transfer Schemes the Example of CCRIF SPC Isaac Anthony Chief Executive Officer CCRIF SPC Fourth Forum of the Standing Committee on Finance Financial instruments that address the risks of loss and damage Session 3 September 5,

2 Risk Transfer Schemes

3 Economic costs of natural disasters have increased dramatically over the past century The frequency of hazards and disasters is increasing Mortality resulting from disasters seems to be decreasing Economic costs of disasters are rising precipitously Losses for Latin America and the Caribbean in the past 100+ years Hurricane Ivan 2004 Hurricane Mitch 1998 Haiti Earthquake

4 Integrated Disaster Risk Financing Strategies Governments need to be encouraged to develop, make provision for, or participate in integrated disaster risk financing strategies, as part of their overall risk management strategy 4

5 Reasons for Pursuing Ex-Ante Financing Instruments 3 reasons governments should pursue exante financing strategies Governments are typically responsible for large portfolios of public infrastructure assets subject to risk To guarantee sufficient capital for emergency relief and assistance to affected households, businesses and communities. If governments lack the necessary infusion of post-disaster capital to rebuild critical infrastructure, restore homes and provide humanitarian assistance, indirect costs can greatly surpass the direct losses of a disaster Developing countries have a higher propensity for post-disaster resource deficits. Governments of developing countries typically must divert from their budgets or from already disbursed development loans to finance post-disaster expenses, also relying on new loans and donations from the international community 5

6 financing mechanism The role of risk transfer in addressing loss and damage Risk Transfer an ex-ante Shifts the financial risks of loss and damage from one entity to another Is associated with a fee for service Is undertaken when the country assesses that the potential loss and damage it could experience could be greater than its ability to manage that loss and damage Is used to reduce the uncertainty and volatility associated with potential loss and damage Risk transfer does not directly prevent or reduce the risk of loss or damage. However, the financial liquidity provided risk transfer 6 approaches can reduce some of the indirect effects of damage

7 Overview of CCRIF

8 CCRIF - An Internationally Recognized Example of a Risk Transfer Mechanism Prompted by Hurricane Ivan and request for assistance by Caribbean governments made to the World Bank The world s first multi-country risk pool providing parametric insurance Originally designed to limit the financial impact of catastrophic hurricanes and earthquakes Provides short-term funding to support relief in the immediate aftermath of a natural disaster 8

9 CCRIF is operated on behalf of its participating states, each of which pays an annual premium directly related to the amount of risk each transfers to CCRIF By pooling catastrophe risks into a single diversified portfolio, countries premiums are about half of what it would cost if they were to purchase identical coverage individually compared with buying the coverage from CCRIF In 2014, the facility was restructured into a segregated portfolio company (SPC) to facilitate expansion into new products and geographic areas and is now named CCRIF SPC. By establishing segregated portfolios, CCRIF is able to prevent the crosssubsidization of risk from one region to another, ensuring that each region s risk will be based on the particular risk profiles of the countries in that region. In April 2015, CCRIF signed an MOU with COSEFIN to enable Central American countries to formally join the facility. Nicaragua is first Central American member.

10 CCRIF s Use of Risk Transfer

11 How CCRIF Policies Work Parametric insurance disburses funds based on the occurrence of a predefined level of hazard and impact Policy triggered on the basis of exceeding a preestablished trigger event loss Estimated based on wind speed and storm surge (tropical cyclones) or ground shaking (earthquakes) or volume of rainfall (excess rainfall) Hazard levels applied to pre-defined government exposure to produce a loss estimate Payout amounts increase with the level of modelled loss, up to a pre-defined coverage limit 11

12 Elements of CCRIF Policies CCRIF policy premiums depend on the selection by Governments of 3 elements: Attachment Point Ceding Percentage Coverage Limit These are informed by the country s risk profiles 12

13 CCRIF Policies at work CCRIF offers earthquake, tropical cyclone and excess rainfall policies to Caribbean and Central American governments CCRIF makes payouts within 14 days after an event Since 2007, CCRIF has made 15 payouts totalling approximately US$38.7 million to 10 member governments CCRIF funds have been used to: Keep the wheels of government turning (e.g. cover the salaries of key emergency personnel) Repair critical infrastructure, e.g. roads, bridges Make improvements to critical infrastructure e.g. drainage Institute mitigation measures e.g. install meteorological data collection equipment Provide general budget support 13

14 Gaps, Limitations, Favourable Conditions

15 Limitations Most current and potential member countries face fiscal constraints Some countries place limited attention on the linkages between fiscal policy and disaster risk management, which can result in low levels of coverage for these countries A few countries have been affected by hazard events which caused damage but which did not trigger their policies often because the event was below the country s policy attachment point. This has been an issue with some countries that do not have a fulsome understanding of parametric policies. The Excess Rainfall policy, introduced in 2013, filled a major gap because Tropical Cyclone policies, available from 2007, account for damage from wind and storm surge only and not from rainfall, which causes much damage during hurrricanes.

16 Success Factors Keeping premiums low Risk pooling Providing discounts and bundling products when possible Being flexible and responsive to members needs Developing new products Expanding into new geographical regions Providing preferable policy options (e.g. lower attachment points) Increasing understanding of CCRIF products Leads to informed decision making Engagement with donors Frequent interaction Sourcing funding for new products Support for most disadvantaged countries

17 Thank You CCRIF SPC ccrif_pr CCRIF_SPC 17